Published on December 09, 2016
If you think you're good at handling stress, chances are you might reconsider this belief after going through the process of purchasing a home. Stress isn't unusual, nor is it unwarranted - a home purchase is often the biggest financial transaction of one's life, and there is plenty of work and luck involved in finding the perfect home and finally closing the deal. Fortunately, there are several ways to simplify crucial steps in the homebuying process. One of them is mortgage preapproval.
If you've been on the lookout for a home loan, you've probably noticed offers from lenders to get preapproved or pre-qualified for a mortgage in promotional materials. While these steps may seem similar on the surface, they are actually two different processes and can't be treated as synonymous.
As Realtor.com explained, pre-qualification is actually the less intensive of the two options. When a lender runs a pre-qualification check, they usually ask to see basic information on your credit history, as well as your current income, assets and debts. If the lender deems these metrics to be acceptable, they will certify that you will most likely qualify for a loan under their standards. However, pre-qualification is not a guarantee, so homebuyers should not rush out to make a home purchase with just a pre-qualification letter in hand.
Preapproval, on the other hand, tends to be more formal, but also more strict. To be preapproved for a mortgage requires a lender to get the most accurate assessment possible of your ability to afford a loan. This means prospective homebuyers should be prepared with the following detailed information when seeking preapproval:
As you can tell, being preapproved for a mortgage involves quite a bit of work getting these documents organized in a timely manner. But that hard work pays off once your lender reviews them and deems you a good candidate for a home loan.
Upon issuing a preapproval letter, your lender will also specify exactly how much money they are willing to extend your way, and how much interest and other fees will cost. Note that preapprovals are only good for a certain amount of time, according to Nerdwallet, usually for between 90 and 120 days.
With this letter in hand, homebuyers can use it not only as a tool to simplify their home search, but also as a bargaining chip. The preapproval amount is the most that a lender will be willing to extend to you for a home purchase. If that amount is $300,000, for example, it's best to look for homes that are selling for less than that amount. There's nothing stopping you from making an offer on a more expensive home, except of course that you will need to make up the difference in some other way.
Therein lies the rub as far as preapprovals go. Since they are essentially a guarantee, a preapproved buyer is much more enticing to a home seller than someone without a bank guarantee. However, the ultimate decision to accept an offer from a preapproved buyer still rests with the seller. This usually happens during the closing process, when the seller and their agent has the chance to vet a promising buyer. In the course of closing, any number of things could happen that end up derailing the sale. That could mean a preapproved buyer still won't be able to ink a deal regardless of their lender's help.
This doesn't mean that preapproval is a waste of time. Rather, it is generally a good idea for homebuyers who have solid credit history and a good idea of exactly what they are looking for in a home. In most cases, a preapproval will work to the benefit of the buyer as it will give them and their real estate agent confidence and flexibility to move forward with a home search.